SAN FRANCISCO – The West Coast states and British Columbia have formed what they describe as a first-of-its-kind partnership to cooperate on financing public infrastructure projects through private investment.
The West Coast Infrastructure Exchange would bring public projects from California, Oregon, Washington and British Columbia together with private investment in an effort to tackle a massive need for infrastructure upgrades in coming decades.
“In this region alone we are looking at probably the need for $1 trillion of infrastructure investment over the next 30 years,” said Oregon Gov. John Kitzhaber during a press conference in San Francisco on Wednesday to unveil the initiative. “The problem is that traditional sources of financing for public infrastructure, particularly federal dollars, are much less certain and more scarce than they had been before.”
A study commissioned by the partnership found that state and local governments are finding it harder to fund infrastructure projects through traditional municipal bond markets.
All three states and local governments up and down the coast, are dealing with tight budgets and looking for ways to reduce their debt burdens, while at the same time need to find ways to finance bridges, ports, public water and sewer systems, and dated power grids.
Water projects alone, according to data by the American Society of Civil Engineers cited by the partnership, will cost California $4.6 billion a year.
California Treasurer Bill Lockyer noted during the press conference that state debt service as a percentage of its general fund budget will approach 9% for the next fiscal year.
“We need to figure out smart ways to finance these projects,” Lockyer said. “We have seen infrastructure partnerships where they frankly just weren’t a good deal for the taxpayer and we need to figure out how to do that better.”
During the first year, the goal of the exchange will be to provide information, develop underwriting standards and provide technical assistance. When up and running, the goal would be to evaluate projects and then connect qualifying public projects with private investment.
In the early stages, the exchange will begin financing smaller energy and water projects. Nothing has been selected.
The Oregon State Treasury will coordinate the exchange, which is to be run by an interim management team representing each office. It is in the process of recruiting a director.
Officials said the goal will be to bundle similar projects, allowing smaller projects to qualify for new financing options.
The initial push for the partnership was funded by grants worth $750,000 from the Rockefeller Foundation to the Oregon Treasury.
State officials began discussing jointly financing infrastructure projects last year. Kitzhaber and Oregon Treasurer Ted Wheeler held a meeting in Salem to gauge interest from officials from each of the three states. The grant was sought by Wheeler in coordination with Kitzhaber and Lockyer.
The political framework of the exchange follows the Pacific Coast Collaborative, a cooperation agreement signed in 2008 between Alaska, British Columbia, Washington, Oregon and California.
Asked if political problems may arise, Kitzhaber pointed to the collaboration as recognition of a need for this kind of cooperation.
“The whole purpose of Pacific Coast Collaborative is to develop conversations on regional basis to recognize that we are way beyond the point where our problems stop at political boundaries,” Kitzhaber said.
Part of the grant money was used to fund a study by CH2M Hill, a Colorado-based consulting firm, which found that reduced public budget capacity and market conditions are making it harder for state and local governments to fund infrastructure through municipal bond markets.
The report recommends using “performance-based” financing and development for infrastructure projects, which would include favoring taxable debt in the context of public-private partnerships. Another example would be using tolls versus general taxes or federal grants to fund projects.
“A key challenge facing West Coast states’ policy makers is to undertake the important task of funding infrastructure investment in an environment of reduced levels of federal investment and declining state and local sources of revenue,” the 172-page report said, “and to do so in a manner which reduces the impact on general obligation debt and other legal borrowing limits.”
CH2M Hill said the municipal bond market faces new stress despite the fact that the cost of raising municipal capital has hit 40-year lows. It said the main risk to the market is the “dawning realization that the deep fiscal challenges faced by state and local governments are not receding despite signs of economic recovery.”
The report cited U.S. Government Accountability Office projections that show, due to rising pension and health care costs, the gap between state and local government revenue and spending will steadily deteriorate though 2060 without policy changes. It added that new municipal bond issuance in 2011 was down 45% from 2010 despite the lowest interest rates in a generation.
The report found that private investors are interested in expanding their investment in the U.S. infrastructure market; however, there is a widespread belief that bureaucracy, regulation and local agency financial practices make partnerships with government agencies unlikely and difficult.
CH2M Hill pointed to successful programs in Canada, Australia and Europe and in individual states and cities as examples of a new push toward public-private partnerships.
In 2002, British Columbia formed Partnership BC, the first agency in Canada to focus on public-private partnerships, supporting $12.5 billion of P3s. The country then established PPP Canada, which has put $1.2 billion into a P3 fund. Europe has formed the European PPP Expertise Centre and Victoria, Australia has a dedicated P3 team.
There are also examples in the states. Virginia formed the Office of Transportation Public-Private Partnerships and Chicago has formed the Chicago Infrastructure Trust.
California also made a move towards P3s during Gov. Arnold Schwarzenegger’s administration that resulted in the Presidio Parkway road project and a courthouse in Long Beach.
A recent report by the state’s Legislative Analyst Office said those projects could have better utilized P3 financing.